DECEMBER 26, 2014

By H S Brar

A large number of entities get railway tracks laid and other support structures for transportation of raw material/finished goods to/from their plant sites to the nearest Indian Railways railway station. The issues under discussion are -

• Whether railway lines and other support structures built by business entities for transportation of raw material/finished goods to/from their plant sites to the nearest Indian Railways railway station constitutes "railways” as mentioned in the Finance Act, 1994 and whether laying/maintenance of the same attracts service tax?

• Whether repair/ renovation/alteration of "Railways” is taxable post 01.07.12?”

2. Prior to 01.07.12, service tax was leviable on "Commercial or Industrial Construction Service” which was defined as,

"Commercial or Industrial Construction” means -

(a) construction of a new building or a civil structure or a part thereof; or

(b) construction of pipeline or conduit; or

................

(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, which is -

(i) used, or to be used, primarily for; or

(ii) occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in,

commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways , transport terminals, bridges, tunnels and dams;

(Section 65(25b) of the Finance Act, 1994)

and under "Works contract service”, which as per Section 65(105)(zzzza) of the Act, means any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways , transport terminals, bridges, tunnels and dams.

3. W.e.f. 01.07.12, Notification no. 25/2012-ST dated 20.06.12 has exempted services by way of construction, erection, commissioning, or installation of original works pertaining to an airport, port or railways , including monorail or metro .

4. Therefore, prior to 01.07.12, both "Commercial or Industrial Construction Service” as well as "Works contract service” excluded service provided in respect of roads, airports, railways , transport terminals, bridges, tunnels and dams from the levy of service tax and w.e.f. 01.07.12, vide Notification no. 25/2012-ST dated 20.06.12, services by way of construction, erection, commissioning, or installation of original works pertaining to an airport, port or railways , including monorail or metro have been exempted.

5. A large number of mega projects have procured land for setting up their plant as well as for laying a railway track from a nearby railway station to their plant site for either supply of fuel/raw material and/or transportation of their finished goods/by products etc. Normally the linkage work on land belonging to Indian Railways(IR) at the said Railway Station with the track got laid by the said project owners is got done by the IR and cost of such work reimbursed by the former. The track on the land owned by the business entities is got laid from third parties, of course, as per Railways specifications. The subject tracks are not used for any other traffic, goods or passenger, and are property of the said project owners.

6. "Railways” has not been defined in the Finance Act, 1994. However, the same has been defined under Section 2 of the Railway Act, 1989 as -

"(31) "railway" means a railway, or any portion of a railway, for the public carriage of passengers or goods, and includes--

(a) all lands within the fences or other boundary marks indicating the limits of the land appurtenant to a railway;

(b) all lines of rails, sidings, or yards, or branches used for the purposes of, or in connection with, a railway;

(c) all electric traction equipments, power supply and distribution installations used for the purposes of, or in connection with, a railway;

(d) all rolling stock, stations, offices, warehouses, wharves, workshops, manufactories, fixed plant and machinery, roads and streets, running rooms, rest houses, institutes, hospitals, water works and water supply installations, staff dwellings and any other works constructed for the purpose of, or in connection with, railway;

(e) all vehicles which are used on any road for the purposes of traffic of a railway and owned, hired or worked by a railway; and

(f) all ferries, ships, boats and rafts which are used on any canal, river, lake or other navigable inland waters for the purposes of the traffic of a railway and owned, hired or worked by a railway administration, but does not include--

(i) a tramway wholly within a municipal area; and

(ii) lines of rails built in any exhibition ground, fair, park, or any other place solely for the purpose of recreation;”

Further sub-sections (20) & (25) of Section 2 of the Railways Act, 1989 define Government Railway as well as non-Government Railway as,

"(20) "Government railway" means a railway owned by the Central Government;

.............

(25) "non-Government railway" means a railway other than a Government railway;”

7. Thus, we can see that there can be two types of "railway”, Government as well as non-Government. However, for both of them to qualify as "railway" it should be used for the public carriage of passengers or goods. In case the track in question is meant exclusively for the private use of the project owners for transport of goods upto/from their plant, the same cannot qualify as "railway” as it is not used for public carriage of passenger or goods. Hence, even though the said track may be constructed by using Rails as per the specifications of the Railway Act, 1989, the same cannot qualify as "railway” and not eligible for exemption provided in the Finance Act. It is actually a "private siding” as explained in Section 94 of the Railway Act, 1989, which deals with the liability of damage to in transit goods on the owner of the private siding upto the specified point of interchange of wagons between the siding and the railway administration and states as under :-

"94. Goods to be loaded or delivered at a siding not belonging to a railway administration .

• Where goods are required to be loaded at a siding not belonging to a railway administration for carriage by railway, the railway administration shall not be responsible for any loss, destruction, damage or deterioration of such goods from whatever cause arising, until the wagon containing the goods has been placed at the specified point of interchange of wagons between the siding and the railway administration and a railway servant authorised in this behalf has been informed in writing accordingly by the owner of the siding.

• ...”

8. A two member bench of the Mumbai Bench of CESTAT in its judgement in the case of M/s Afcons Infrastructure Ltd Vs Commissioner of Central Excise, Mumbai-II 2013-TIOL-1225-CESTAT-MUM has held that the demand of service tax on construction undertaken for Delhi Metro Rail was unsustainable even for the period prior to 01.07.12. In para 3.3 of the said decision, the Hon'ble Delhi High Court judgement in the case of DMRC vs. Municipal Corporation of Delhi in the context of levy of local taxes reported in 2008(103) DRJ 369 was quoted wherein, the Hon'ble Court after examining the provisions of the Indian Railways Act, 1989 held as follows:

" 9. The word Railway as per the above definition means Railway or any portion thereof, but the same should be used for public carriage of passengers, goods and includes various properties as specified in clauses (a) to (f) therein. The term ‘Railway', in the first part of the definition clause relies upon the word "Railway" as is understood in normal parlance, with a stipulation that it should be used for the purpose of transportation of public carriage of passengers or goods. The Supreme Court in the case of Shahadara (Delhi) Saharanpur Light Railway Company vs. Municipal Board reported in AIR 1969 SC 513, had agreed with the contention of the appellant therein that the expression ‘Railway' as is commonly understood means carriage of passengers and goods on iron rails. The term ‘Railway' as described in Article 366(20) does not include tramway wholly within the municipal area, line of communication wholly situated in one State and declared by the Parliament by law not to be Railway. The petitioner qualifies and is a Railway within the meaning of Section 2(31) of the 1989 Act. It is engaged in transportation of passengers on rails. It is a public carriage. This factual position is not challenged by the respondent.

10. In view of the reasoning given above, it has to be held that Section 184 of 1989 Act grants protection from levy of taxation by a local authority to ‘railway administration' be it a Government Railway or a Non Government Railway. The petitioner, therefore, will be entitled to protection under Section 184 of the Act to the extent it is a ‘railway administration' as defined in section 2(32) read with section 2(25) of the 1989 Act."

9. This only emphasises the view of the author detailed above, to the effect that for a railway to qualify as "railway” , it has to be engaged in " public carriage of passengers or goods”. If the said railway is not used for " public carriage of passengers or goods” it cannot be considered as "railway” and the exemption to the activity of laying or maintenance or operation of the said "private siding” is liable to service tax .

10. Another point of discussion is the leviability of service tax on the charges collected by the Indian Railway(IR) from the project owners in relation to the laying of such "private siding”. The details of the charges collected by the Indian Railways have been provided in the Freight Marketing Policy Circular no. 01 of 2012 issued by the Railway board, Ministry of Railways vide F No. 99/TC(FM)/26/1/Pt.-II dated 30.01.12. The details of the same is as below:-

11. The procedure to be followed for constructing private Railway siding is as under:-

Initially, the party must obtain Rail Transport Clearance (RTC) from the Railway Board. On the basis of various parameters including the availability of line capacity and operational feasibility, the RTC is issued by the Railway Board in consultation with Zonal Railway. After having received the RTC, the party submits a Pre-feasibility Report which is examined in division and Chief Traffic Planning Manager's(CTPM) office in view of existing traffic and infrastructure available at station vis-à-vis proposed traffic and willingness to create/develop infrastructure at serving station/new crossing station. After examination of proposal, ‘In Principle Approval' is granted in consultation with the division. 1% survey charge of total project cost is to be deposited by the party before issuance of IPA and party is asked to deposit Detailed Project Report.The Detailed Project Report and conceptual yard layout submitted by the party is examined in detail by division and CTPM's office in view of traffic offering. Necessary changes are suggested to the party. After necessary changes, approval of DPR is communicated to the party. Party is required to deposit 1% of total project cost as approved by the divisional finance so as to complete 2% of the revised estimated cost. ESP is prepared by the division in accordance with approved DPR and sent to HQ office for examination and approval. After incorporating changes if required, ESP is sent to the division concerned. After approval of ESP by the division and headquarter office, SIP is be prepared and examined/approved by railways. After approval of SIPs, the division approves the detailed estimates of the work and the work is to be executed by the party through its consultants in its own premises while the work will be executed by Railways on deposit basis in the Railway boundary. After completion of work safety trial and final inspection will be conducted by the Railways on the request of the party. 2% of project cost will be recovered at this stage if work has been executed by the party under supervision of approved railway consultant. The OHE work and the S&T work at the serving station are executed by the Railways as a deposit work keeping in view the safety requirement.

12. The charges, as detailed above, collected by IR are for rendering services to the party in support of the laying of the private railway siding by the latter which do not appear to be statutory in the nature.

13. In pursuance to the amendments in the Finance Act, 1994 vide Finance Bill, 2012 and issuance of Notfn. No. 30/2012-ST dated 20.06.12, all of which are effective from 01.07.2012, services in the nature of "support services” provided by Government to a business entity are liable to service tax and the liability to deposit the tax rests in the service recipient.

14. Section 66D of the Finance Act, 1994, while identifying the services not liable to service tax, describes the services provided by the Government which are taxable and states as under,

"66D. Negative list of services : -The negative list shall comprise of the following services, namely:-

(a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere-

(i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government;

(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

(iii) transport of goods or passengers; or

(iv) support services , other than services covered under clauses (i) to (iii) above, provided to business entities;

...”

The "support services” are defined in Section 65B of the Act, which reads -

"65B. Interpretations : In this Chapter, unless the context otherwise requires,-

(1) "actionable claim" shall have the meaning assigned to it in section 3 of the Transfer of Property Act, 1882;

...

(49) " support services " means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis;”

The person liable to pay the service tax on the "support services” provided by "Government” to a "business entity” has been declared as the service recipient vide Notfn. No. 30/2012-ST , the relevant extracts of which are as under,

"I. The taxable services,-

(A) (i) provided or agreed to be provided by an insurance agent to any person carrying on the insurance business;

…

(iv)provided or agreed to be provided by,-

(A) an arbitral tribunal, or

(B) an individual advocate or a firm of advocates by way of support services, or

(C) Government or local authority by way of support services excluding,-

(1)renting of immovable property, and

(2)services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994, to any business entity located in the taxable territory;

…

(B) provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory;

(II) The extent of service tax payable thereon by the person who provides the service and the person who receives the service for the taxable services specified in (I) shall be as specified in the following Table, namely:-

Table

15. In view of the above provisions, effective from 01.07.12, the "support services” like infrastructural, operational, administrative, logistic, marketing or any other support of any kind, including advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis provided by Government to a business entity are liable to service tax and the said tax is payable by the service recipient. In the present case the party is receiving services from the Indian Railways in respect of laying of the private railway siding by them. The said services are taxable w.e.f. 01.07.12 and in view of the provisions of Notification no. 30/2012-ST,the party is liable to pay service tax, being the service recipient, on the amounts paid to the Indian Railways on the above accounts.

16. Now let us take up the second issue of "Services by way of repair, maintenance, alteration or renovation works pertaining to railways”. Railways here means not just rail lines but also all other things as defined in para 6 above. Notification no. 25/2012-ST provides for exemption to works relating to Government/railways as evident below -

12. Services provided to the Government, a local authority or a governmental authority by way of construction , erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -

(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or(iii) an art or cultural establishment;

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or

(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act;

13. Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-

(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;

(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or RajivAwaasYojana;

(c) a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;

(d) a pollution control or effluent treatment plant, except located as a part of a factory; or

a structure meant for funeral, burial or cremation of deceased;

14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-

(a) an airport, port or railways , including monorail or metro;

(b) a single residential unit otherwise than as a part of a residential complex;

(c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership' framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;

Sr. No. 12 deals with services provided to Government, but none of its sub-causes cover railways. Sr. No. 13 deals with repair, maintenance, renovation, or alteration works but the same cover neither Government nor railways. Sr. no. 14 covers services by way of construction, erection, commissioning, or installation of original works pertaining to railways but does not cover repair, maintenance, renovation, or alteration works pertaining to the same. Thus, none of the sub-clauses covers cover repair, maintenance, renovation, or alteration works pertaining to railways and the same is taxable w.e.f. 01.07.12.

It is hoped that before the issue snowballs into a major controversy the Board comes out with a clarification and efforts are taken to safeguard government Revenue.

(The author works in the department and the views expressed are strictly personal.)